Automated Market Maker (AMM)

AMMs, as a kind of decentralized exchange, are platforms that set asset prices using certain mathematical formulas, instead of order books. Computed algorithms use crowdsourced liquidity pools. Every transaction made on the platform is carried out through the assets transferred to the pools by the liquidity providers.

See Also: What are DEXs?

3 Different Roles You Can Play on AMMs

In Automatic Market Makers, you can think of the platform itself as a waiter that presents the assets provided by the users to the users. But an automated waiter.

• Traders: Traders are users who buy and sell their assets within AMM.
• Liquidity providers: They are the investors who earn passive income with advantages such as yield farming by depositing liquidity in the pool of the protocol.
• Protocol governors: Users who own the platform’s governance token have a say in every step from the APY values ​​to be offered for liquidity providers to other decisions. It is a decentralized and democratic space.

Understanding AMMs: How They Are Different From Traditional Crypto Exchanges?

In traditional fiat and crypto exchanges, the prices of assets are determined by the order book. An order book can be defined as constantly updated real-time data covering all of the traders’ buy and sell orders.

For a trader to buy at a traditional exchange, the same currency must be sold by someone else at the same price. But this does not apply to AMMs. Various algorithms are used in AMMs to offer the same price to all users. Users do not trade against each other, but against the liquidity pool. For example, if you are going to trade CAKE – ETH in Pancakeswap, the automated fixed algorithm calculates the affect rate of the transaction on the liquidity pool. As a result of this calculation, it gives you a price offer that is in line with what it would give to many other people. When the transaction is completed, your assets will come to your wallet from the ETH pool. UNIs that you sell are transferred to the relevant pool.

AMM Models: Kyber Network and Uniswap

• Liquidity pools in Kyber Network are created by professional market makers. Since the Kyber team creates the liquidity pools on its own platform with its own team or with professional market makers, anyone who wants it from outside cannot provide liquidity to the liquidity pool.
• In Uniswap, on the other hand, the system is literally managed by algorithms. In this AMM model, anyone can contribute to the liquidity pools, in fact, they also receive passive income by providing liquidity. Unlike Kyber Network, the Uniswap smart contract cannot be controlled or modified. Transactions of tokens are carried out literally with token pairs in the pool.

Pros and Cons of Automated Market Makers